The Conundrum of the Two-Pillar Solution

June 21, 2022

The Organization for Economic Co-operation and Development (OECD) Pillar 2 Rules reached a ground-breaking international accord, with over 130 countries that agreed to impose a minimum 15% corporate tax on multinational enterprises (MNEs) with a global turnover of €750 million or more.

The proposed global minimum tax will be implemented as a “top-up” tax to increase the tax burden of MNEs to at least 15% in countries where the MNEs’ tax burden, on a country-by-country basis, is lower than 15%.

Questions have been raised whether the accounting rules in the consolidated financial statements used in Pillar 2 can be reconciled with local generally accepted accounting principles without incurring considerable extra cost and risk. A particular focus is the risk of double taxation when applying the Pillar 2 rules alongside existing regulations.

The OECD’s model rules on Pillar 2 bring together two interlocking measures:

Firstly, the income inclusion rule (IIR): A top-up tax on the ultimate parent entity of a low-taxed foreign subsidiary; and secondly the undertaxed payment rule (UTPR): The UTPR requires a UTPR taxpayer that is a member of an MNE Group to make an adjustment in respect of any top-up tax that is allocated to that taxpayer from a low-tax Constituent Entity of the same group.

The OECD Model Rules suggest the following for the geographical attribution of additional tax revenue.

Firstly, a Qualified Domestic Minimum Top-up Tax (QDMTT) can be levied in an under -taxed country where a subsidiary of MNE is located. Secondly, the domicilium country where ultimate parent company is located, can apply a global minimum tax of 15% through the IIR, and lastly in exceptional circumstances where the global minimum tax is not charged under the IIR, other high-tax countries where the members of MNEs are located, can apply the UTPR.

Very few countries are on track to legislate or implement Pillar 2— similarly with Pillar 1, which aims at reallocating taxing rights to reflect an increasingly digitized global economy. There is a serious risk of tax disputes and double-taxation due to the differences in interpretation, application, and legislative enactments which raises the question if it is feasible to set the date for implementation for 2023. While there may be a temptation to leave preparations until everything is set in stone, this would leave your business with dangerously little time to get ready for what is a major overhaul ahead.



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